The Changing Relation Between the Canadian and U.S. Yield Curves
The term structures of Canada and of the United States, two countries with historically close economic ties, have been closely linked. We investigate the link between Canadian and U.S. yield curves and show previously strong correlations between yield curve components dissipate after Canadian monetary policy reforms in the early 1990s. First, the effect is particularly evident in the diminished cross-country correlations of the short term bond yields. Secondly, cross-country yields are cointegrated before the reforms, but not afterwards. Lastly, the results on the term structure are shown using a vector autoregression with an endogenously determined break date for Canadian and U.S. estimates of the three-factor Nelson-Siegel (1987) yield curve model.
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